Financial Instruments

9 Months Ended

May 01, 2011

Financial Instruments

Financial Instruments

12.  Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings, excluding the current portion of long-term debt, approximate fair value.  The fair value of long-term debt, including any current portion of long-term debt in short-term borrowings, was $2,579 at May 1, 2011 and $2,829 at August 1, 2010.  The fair value of long-term debt was based on quoted market prices or pricing models using current market rates.

The principal market risks to which the company is exposed are changes in foreign currency exchange rates, interest rates, and commodity prices.  In addition, the company is exposed to equity price changes related to certain deferred compensation obligations.  In order to manage these exposures, the company follows established risk management policies and procedures, including the use of derivative contracts such as swaps, forwards and commodity futures and option contracts.  These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures.  The company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments.  The company's derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment.

The company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations.  The company minimizes the counterparty credit risk on these transactions by dealing only with leading, credit-worthy financial institutions having long-term credit ratings of "A" or better.  In addition, the contracts are distributed among several financial institutions, thus minimizing credit-risk concentration.  The company does not have credit-risk-related contingent features in its derivative instruments as of May 1, 2011.

Foreign Currency Exchange Risk

The company is exposed to foreign currency exchange risk related to its international operations, including non-functional currency intercompany debt and net investments in subsidiaries.  The company is also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries.  Principal currencies hedged include the Australian dollar, Canadian dollar, euro, Swedish krona, New Zealand dollar, British pound and Japanese yen.  The company utilizes foreign exchange forward purchase and sale contracts as well as cross-currency swaps to hedge these exposures.  The contracts are either designated as cash-flow hedging instruments or are undesignated.  The company typically hedges portions of its forecasted foreign currency transaction exposure with foreign exchange forward contracts for up to 18 months.  To hedge currency exposures related to intercompany debt, the company enters into cross-currency swap contracts for periods consistent with the underlying debt. As of May 1, 2011, cross-currency swap contracts mature in 2012 through 2015.  The notional amount of foreign exchange forward and cross-currency swap contracts accounted for as cash-flow hedges was $241 at May 1, 2011 and $261 at August 1, 2010.  The effective portion of the changes in fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the Consolidated Statements of Earnings on the same line item and same period in which the underlying hedge transaction affects earnings.  The notional amount of foreign exchange forward and cross-currency swap contracts that are not designated as accounting hedges was $709 and $757 at May 1, 2011 and August 1, 2010, respectively.

Interest Rate Risk

The company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain its variable-to-total debt ratio within targeted guidelines.  Receive fixed rate/pay variable rate interest rate swaps are accounted for as fair-value hedges.  The notional amount of outstanding fair-value interest rate swaps totaled $500 at May 1, 2011 and at August 1, 2010.  These swaps mature in 2013 through 2014.

Commodity Price Risk

The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products.  The company also enters into commodity futures and options contracts to reduce the volatility of price fluctuations of diesel fuel, wheat, natural gas, soybean oil, aluminum, sugar, cocoa, and corn, which impact the cost of raw materials.  Commodity futures and option contracts are typically accounted for as cash-flow hedges or are not designated as accounting hedges.  Commodity futures and option contracts are typically entered into to hedge a portion of commodity requirements for periods up to 18 months.  The notional amount of commodity contracts accounted for as cash-flow hedges was $19 at May 1, 2011 and $7 at August 1, 2010.  The notional amount of commodity contracts that are not designated as accounting hedges was $53 at May 1, 2011 and $43 at August 1, 2010.

Equity Price Risk

The company hedges a portion of exposures relating to certain deferred compensation obligations linked to the total return of the Standard & Poor's 500 Index, the total return of the company's capital stock and the total return of the Puritan Fund or, beginning in January 2011, the total return of the Vanguard International Stock Index.  Under these contracts, the company pays variable interest rates and receives from the counterparty either the total return of the Standard & Poor's 500 Index, the total return on company capital stock, the total return of the Puritan Fund or the total return of the iShares MSCI EAFE Index Fund, which is expected to approximate the total return of the Vanguard International Stock Index.  The contracts related to the Puritan Fund matured in January 2011.  The contracts are not designated as hedges for accounting purposes and are typically entered into for periods not exceeding 12 months.  The notional amount of the contracts outstanding was $70 as of May 1, 2011 and $75 as of August 1, 2010.

The following table summarizes the fair value of derivative instruments recorded in the Consolidated Balance Sheets as of May 1, 2011, and August 1, 2010:

		May1,	August1,
	Balance Sheet Classification	2011	2010
Asset Derivatives
Derivatives designated as hedges:
Foreign exchange forward contracts	Other current assets	$            1	$              1
Commodity derivative contracts	Other current assets	2	1
Cross-currency swap contracts	Other assets	—	3
Interest rate swaps	Other assets	35	46
Total derivatives designated as hedges		$            38	$            51
Derivatives not designated as hedges:
Foreign exchange forward contracts	Other current assets	$            —	$              1
Commodity derivative contracts	Other current assets	6	3
Cross-currency swap contracts	Other current assets	—	13
Deferred compensation derivative contracts	Other current assets	1	—
Cross-currency swap contracts	Other assets	—	1
Total derivatives not designated as hedges		$              7	$            18
Total asset derivatives		$            45	$            69

		May1,	August1,
	Balance Sheet Classification	2011	2010
Liability Derivatives
Derivatives designated as hedges:
Foreign exchange forward contracts	Accrued liabilities	$              7	$              1
Commodity derivative contracts	Accrued liabilities	—	1
Cross-currency swap contracts	Accrued liabilities	10	—
Cross-currency swap contracts	Other liabilities	31	24
Total derivatives designated as hedges		$            48	$            26
Derivatives not designated as hedges:
Foreign exchange forward contracts	Accrued liabilities	$              5	$              1
Cross-currency swap contracts	Accrued liabilities	6	—
Deferred compensation derivative contracts	Accrued liabilities	—	2
Cross-currency swap contracts	Other liabilities	91	14
Total derivatives not designated as hedges		$          102	$            17
Total liability derivatives		$          150	$            43

The derivative assets and liabilities are presented on a gross basis in the table.  Certain derivative asset and liability balances, including cash collateral, are offset in the balance sheet when a legally enforceable right of offset exists.

The following tables show the effect of the company's derivative instruments designated as cash-flow hedges for the three- and nine-month periods ended May 1, 2011 and May 2, 2010, in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:

Derivatives Designated as Cash-Flow Hedges

Three Months Ended May 1, 2011, and May 2, 2010		Total     Cash-Flow         Hedge   OCI Activity
		2011	2010
OCI derivative gain/(loss) at beginning of quarter		$   (25)	$ (22)
Effective portion of changes in fair value recognized in OCI:
Foreign exchange forward contracts		(7)	(6)
Cross-currency swap contracts		—	1
Forward starting interest rate swaps		—	(3)
Commodity derivative contracts		(1)	1
Amount of (gain) or loss reclassified from OCI to earnings:	Location in Earnings
Foreign exchange forward contracts	Other expenses/income	1	—
Foreign exchange forward contracts	Cost of products sold	—	4
Forward starting interest rate swaps	Interest expense	1	—
Commodity derivative contracts	Cost of products sold	(1)	—
OCI derivative gain/(loss) at end of quarter		$   (32)	$ (25)

Derivatives Designated as Cash-Flow Hedges

Nine Months Ended May 1, 2011, and May 2, 2010		Total     Cash-Flow         Hedge   OCI Activity
		2011	2010
OCI derivative gain/(loss) at beginning of year		$ (28)	$ (31)
Effective portion of changes in fair value recognized in OCI:
Foreign exchange forward contracts		(10)	(7)
Cross-currency swap contracts		—	3
Forward starting interest rate swaps		—	(5)
Commodity derivative contracts		2	—
Amount of (gain) or loss reclassified from OCI to earnings:	Location in Earnings
Foreign exchange forward contracts	Other expenses/income	1	(1)
Foreign exchange forward contracts	Cost of products sold	2	14
Forward starting interest rate swaps	Interest expense	2	1
Commodity derivative contracts	Cost of products sold	(1)	1
OCI derivative gain/(loss) at end of quarter		$ (32)	$ (25)

The amount expected to be reclassified from other comprehensive income into earnings within the next 12 months is a loss of $11.  The ineffective portion and amount excluded from effectiveness testing were not material.

The following tables show the effect of the company's derivative instruments designated as fair-value hedges in the Consolidated Statements of Earnings:

		Amount of		Amount of
		Gain or (Loss)		Gain or (Loss)
		Recognized in Earnings		Recognized in Earnings
		on Derivatives		on Hedged Item
Derivatives Designated	Location of Gain or (Loss)	May1,	May2,	May1,	May2,
as Fair-Value Hedges	Recognized in Earnings	2011	2010	2011	2010
Three Months Ended
Interest rate swaps	Interest expense	$   (4)	$   (2)	$      4	$      2
Nine Months Ended
Interest rate swaps	Interest expense	$ (11)	$     3	$    11	$     (3)

The following table shows the effects of the company's derivative instruments not designated as hedges in the Consolidated Statements of Earnings:

		Amount of Gain or (Loss)
		Recognized in Earnings
		On Derivatives
			Three Months Ended		Nine Months Ended
	Location of Gain or (Loss)		May 1,	May 2,	May 1,	May 2,
Derivatives not Designated as Hedges	Recognized in Earnings		2011	2010	2011	2010
Foreign exchange forward contracts	Other expenses/income		$      1	$      1	$  —	$     (3)
Foreign exchange forward contracts	Cost of products sold		—	—	(1)	—
Cross-currency swap contracts	Other expenses/income		(55)	(9)	(94)	(19)
Commodity derivative contracts	Cost of products sold		1	3	10	—
Deferred compensation derivative contracts	Administrative expenses		—	6	2	10
Total			$  (53)	$      1	$  (83)	$  (12)